Dissecting the Reasons Behind Startup Failure

January 12, 2016

11:38 am

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It looks like such a charmed life, the life of a successful entrepreneur. He, who started from nothing but an idea for a product and went on to turn it into a multi-billion dollar business. And, to top it all off he’s not even thirty, yet.

But, every coin has a flip side.

For every successful entrepreneur out there, there are 9 who failed miserably. Statistics show, 9 out of 10 startups are doomed to fail within the first two years of business. The figure is the same not just for technological startups but for small enterprises, as well.

Although, there are a plethora of reasons that contribute toward startup failure, there are a few core reasons that are common across all failed startups- no matter the niche. Let’s take a look at the 5 common reasons of failure witnessed across almost all failed startups:

1. No Product-Market Fit

According to fortune, one of the biggest reasons for a startup’s success is their product’s market fit. Clearly, their success outlines the importance of researching whether or not the market needs your product. In that vein, 42 percent of failed startups surveyed stated “lack of a market (need) for their product” as the prime reason for their failure.

2. No Cash In The Bank

Most entrepreneurs start off with their own savings combined with small to medium loans from friends and family. Add some failed starts, mismanagement and employment issues – and you’ve got the perfect recipe for a financial disaster. This phenomenon is commonly termed as being “Underfunded”.

When companies start off with very little financial cushion, they in turn leave themselves no margin for errors. And the only way to overcome this hurdle is to grow, fast! If you can keep your startup growing, you can effectively solve most of your problems before they even become problems like losing to the competitors, losing personnel, losing customer or – worst of all – losing your faith and passion in what you’ve started.

3. Bad Hiring Decisions

23 percent of the startups claimed they failed because they didn’t have the right people in their team. Not being able to find the perfect person for a job, hiring an employee with the incorrect amount of experience (or in some cases inexperience) needed, early hires – are all examples of bad hiring decisions.

RateMySpeech.co, a failed startup that intended to help people improve their presentations, pitches and speeches, was a bust because according to its founder they had “no real team”.

Similarly, Allmyapps, an App Store for Windows PC, failed because of various reasons but, early hires was perhaps the biggest one.

4. Can’t Beat the Competition

No matter what niche your startup’s in, you will have competitors vying for your audience/market. Unless, your startup has the financial and personnel strength to maintain itself as the go-to product in the niche, it will start to lose ground to competitors and eventually become unfeasible.

This is exactly what happened to Argyle, a social media management tool for marketers, which had to shut its doors even though they had been in business for 4 years.

5. Too High a Cost

Failing to keep costs of producing the product low, ultimately forces startups to increase their price point. It becomes especially problematic particularly if the startup was selling a “free” product in the first place. Consider, the unfortunate case of Samba Mobile – which had to shutter because of the “high and increasing, unsustainable, data costs”.

If the costs keep increasing, take it as an indicator that you have room to improve and introduce efficiency in your manufacturing process. Setting the price of your startup’s product is a double edged sword, make sure you do it right the first time.

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Nasrullah Patel is the co-founder & director of operations at Peerbits. The company specialized in app development for various industry verticals. Nasrullah likes to be busy with his team and to provide top-notch mobility solutions to enterprises and startups. Follow Peerbits on Facebook.